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Home / World / "Boiled Frog syndrome": Germany's China problem

"Boiled Frog syndrome": Germany's China problem



SCHROBENHAUSEN, Germany (Reuters) – Bauer, a major construction equipment manufacturer, is better positioned than many German companies that have invested heavily in China in recent decades.

Thomas Bauer, Managing Director of the Bavarian construction machinery manufacturer Bauer AG, talks to Reuters in Schrobenhausen on April 3, 201
8. REUTERS / Michael Dalder

The Bavarian company that traces its roots back Until 1790, he does not have to worry about it to make a Chinese joint venture partner happy because he is the sole owner of both his plants in Shanghai and Tianjin.

And the special machinery that Bauer produces is sold in countries across Asia, protecting the group from volatility in the volatile Chinese construction market.

Nevertheless, CEO Thomas Bauer, who leads the company in his family's seventh generation, worries about his company's place in China and a broader economic relationship that until recently was seen by lucrative one-way streets by German corporations and politicians ,

"Germany has put too many eggs in a basket, and this basket is China," said Bauer, a jovial 62-year-old with a strong Bavarian accent, to Reuters at the company headquarters in Schrobenhausen, an hour's drive north of Munich.

Bauer's BSAG.DE Group points to a growing fear in Germany. For more than a decade, the country has been Europe's growth engine, its economy has weathered the global financial turmoil, the debt crisis in the Eurozone and a record influx of refugees.

This resilience was based on two key factors: Germany had innovative companies that produced high-quality finished goods that needed fast-growing economies; and the country was better than others in profiting from an open, rule-based global trading system that rewarded competitiveness.

China was crucial on both fronts. Over the past decade, it has been buying up German cars and machines at a staggering pace as it has gradually opened up to foreign companies. Last year alone, German manufacturers in China sold nearly five million cars, more than three times as much as in the US.

But even in good times, there is a radical shift in which Deutschland AG sees the huge Chinese market.

Under President Xi Jinping, not only has the opening of China shifted in the opposite direction, but Chinese companies have made much faster progress in the value chain than many expected in Germany.

Germany's China problem is part of a larger challenge Europe is facing. The years of domestic crisis management have politically divided the bloc and prepared it badly to respond to the emerging geopolitical and economic challenges. Now the continent is risking being pushed between a more assertive Beijing and Donald Trump's "America First" policy.

Privately, some executives compare the situation of German industry in China with the proverbial frog in a pot of slowly warming water, which eventually cooks to death because it can not or will not pop out.

Germany's ambassador to China, Michael Clauss, warned of "tectonic changes" in the relationship last month at a meeting with industry leaders in Berlin, the participants said.

"We have to prepare people here for a new era in our partnership with China," said an official of the powerful German BDI industry association. "These are still golden times, but there is great concern about what lies ahead."

Slideshow (7 images)

(GRAPHICS: Germany's China Problem – tmsnrt.rs/2GUN6BK)

ROLE OF THE STATE [19659019] German companies were among the first in the West to settle in China, giving Germany an advantage as the Chinese economy gained momentum.

Bilateral trade between the two countries reached a record 187 billion euros last year, overshadowing China's trade with France and the UK, both around 70 billion. In 2017, Germany had a trade deficit of 14 billion euros against China, which is small compared to the US deficit of 375 billion dollars or 346 billion euros.

Bauer AG, which employs 11,000 people in 70 countries, built its first production facilities in China in the mid-1990s. At that time, not a single Chinese company could manufacture the sophisticated drills it produced – towering yellow structures that served as foundations for skyscrapers, power plants, and airports.

Until 2013, Bauer counted 36 Chinese competitors who could produce such machines, a shift that, according to the CEO, was accelerated by European suppliers selling jointly-engineered parts to the Chinese.

A decade ago, the company's Chinese plants generated sales of 109 million euros. In five of the next nine years, sales fell to less than half.

What Bauer and other German companies fear most today is the role of the Chinese state in the economy.

Last year, China introduced a cybersecurity law that tightened state control over Internet services, including secure VPN connections used by foreign companies to communicate confidentially with headquarters. More recently, some German companies have expressed pressure to accept Communist Party officials on the boards of their joint ventures.

The Bauer boss fears that Xi's "Made in China 2025" strategy, which identifies ten key sectors – robotics, aerospace and clean-energy cars – is taking China's leading position in German industrial production ,

In order to maintain its lead, Bauer says his company is intensively involved with digitization.

"There will be no competition against copiers, it will be one against innovative engineers who want to overtake us," he said. "If we do not find answers soon, it can end badly."

TRUMP TARIFF

The German fear of China reflects what prompted Trump to threaten Beijing with tens of billions of dollars in tariffs.

But because Germany's top companies have become so dependent on the Chinese market, the government in Berlin has avoided confronting China head-on.

Already in February, the carmaker Daimler ( DAIGn.DE ) showed how unscrupulous some companies angered Beijing.

Following a setback in China via a Mercedez-Benz ad on Instagram citing the Dalai Lama – the Tibetan spiritual leader seen by Beijing as a separatist – Daimler deleted the post and CEO Dieter Zetsche wrote a letter in which he expressed his deep regret "woe and grief" the "negligent and insensitive mistake" of his company had caused the Chinese people.

"There is a big gap between what people in Germany say about China and what they really think," said Bernhard Bartsch of the Bertelsmann Foundation, a German research group.

At the end of this month, Bertelsmann, together with the Berlin-based Chinese think tank MERICS, will launch a discussion in Oxford Union style on the motion: "In ten years, China will seriously undermine Europe's political and economic system"

The China-based company is also

A survey by the German Chamber of Commerce in China late last year showed that, for the first time in years, more than half of its members were not planning to invest in new locations in China. Nearly 13 percent of Chinese companies operating in China said they could go within the next two years.

For decades Germany's approach to China can be summarized with the motto "Change through Trade".

Now this strategy is in ruins and government officials are joking that the win-win relationship has a new meaning: China wins twice.

"The hope was that closer economic relations would lead to an opening, and today it is clear that this was a false hope," said a German government official. "They tell us what we want to hear and then do the opposite."

Berlin begins to withdraw. After the Chinese company Midea ( 000333.SZ ) triggered the outcry last year, the takeover of the robotics manufacturer Kuka ( KU2G.DE ), it tightened restrictions on foreign investment launched new pan-European rules on screening acquisitions.

In December, domestic intelligence in Beijing made a splash when it accused Chinese counterparts of using counterfeit social media accounts to collect information about German politicians – a rare public censure that Berlin says is Chinese should send a message.

A summit meeting between the German and Chinese governments later this year should reveal a tougher line from Berlin.

But they also acknowledge that divisions within the EU and a huge gap between Europe and the standalone Trump government will make it difficult to force change in Beijing.

"What really worries the Chinese is that Europe and the United States work together against them," said the German official. "In that sense, Trump is really a gift to China."

Reporting by Noah Barkin; Arrangement by Simon Robinson


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